Profit taking isn’t a good way to look at last weeks selling. It tells you that others see something you don’t and they are taking their profits and exiting the market. Based on the average trading volume last week being below average on two of the four trading days and average on the other two, it isn’t exactly a mad rush to the exits. When market volatility picks up the media needs to define and blame something, thus they invent phrases that Wall Street and investors adapt. Profit taking is one of my favorites by-the-way. I would prefer to look at last weeks activity as uncertainty rising and creating fear, which in turn prompts the bias to turn to the sell side. If the bias continues to grow we will get a trend change in the indexes. Thus, we should be looking at the charts and trends of the major indexes and sectors for the downside or selling leaders. What sectors are leading the markets lower and do they have enough momentum to shift the direction… or start a new correction phase for the market?
First, let’s state there isn’t enough data to declare a trend change. However, we have put in a new high and have moved lower. Looking at the chart below of the S&P 500 index we can clearly see the closing high on April 2nd was 1419 and the close on Thursday was 1398. If the futures trades on Friday hold with the index down 20 points that would put the index at 1378 and at the next key level of support for the broad index. Not a correction yet, but it is the start of a pullback and test of the previous high. It would break the four month (short term) uptrend line in play off the December low. This is a big warning sign for short term investment positions. If your time horizon is short term you need to review your stops and plan your options. If your time horizon in long term, support at the 1340 level becomes important to watch. Either way the warnings are out and protecting against the loss of principle takes precedence over belief.
We have been discussing the last two weeks the weakening data points for the economy. Even Mr. Bernanke has done his best to warn about being too optimistic about the economy. However, the jobs report has been the one piece of data over the last three months investors keep alluding to as strength showing an improving outlook for the markets and the economy. That bubble was punctured on Friday as the government reported 120,000 new jobs versus 210,000 expected. Despite the miss the rate of unemployment fell to 8.2%???? Regardless the issue here is confidence! The confidence which was in place just got a shock of about 5 on the Richter scale. Not devastating, but attention gaining. If the confidence of the investor shifts and sentiment shifts, the market will set on a new direction short term. Thus, watch, measure, and act accordingly.
Last, but not least, the earnings season kicks off this week. The key will be forward guidance versus the results for the first quarter. The data matters relative to making earnings, but with the hickup in the data points for the economy we will need companies to set an alternative course, meaning, we need them to confirm they see growth on the horizon and that they are willing to pick up the pace on hiring. It sounds like wishful thinking following the jobs report on Friday, but c